Did Anyone at Harvard Business School Get the No-Layoff Message This Year?

School's almost out. A new crop of MBAs is poised to assume leadership positions in the American economy. Have the horrors of the last two years made a difference in how they plan to run this country's businesses?

The best-selling case study of all time at Harvard Business School (HBS) is not about Coca-Cola or Microsoft, but the Cleveland-based arc welding manufacturer Lincoln Electric. First published in 1975, the case has sold roughly 300,000 copies. Almost every MBA candidate at Harvard reads the original or one of several updated versions, as do tens of thousands more business students across America.

Guaranteed employment, you may have noticed, is rare these days. 8.4 million Americans lost their jobs during the recession. Today, the Department of Labor announced that the unemployment rate rose in April to 9.9 percent. Some of that was due to more people entering the labor force, but more than 15 million Americans remain jobless. More troubling is that almost 7 million have been unemployed for more than 6 months.

Lincoln Electric, by contrast, has not laid off a permanent American employee for economic reasons since at least 1948. Yet since the 1930s, this Fortune 1000 firm has remained the world's largest manufacturer of arc welding technology with factories in 18 countries and sales offices in 150.

The no-layoff guarantee is straightforward: once past a three-year probation, no employee who meets the firm's well-defined, regularly-measured performance standards will ever be out of work. The 1975 Harvard case (by Norman Berg, now Professor Emeritus) explored how Lincoln Electric had grown, while remaining profitable, through good times and bad. Change a few dates, and the case stands updated to 2010. The key is a mutually-reinforcing system of incentives to motivate workers with a no-layoff promise, a rich profit-sharing bonus, the use of piecework to pay factory workers and open internal communications. The case stresses that you can't cherry pick one element - such as guaranteed employment - and expect improvements.

But I was puzzled: if so many prospective MBAs, who become America's corporate elite, study the documented importance of a guaranteed employment promise to this company's decades-long record of success, why is it such a rarity?

One reason is that while the average B-school student reads roughly 400 cases, the Lincoln Electric case is virtually the only one to introduce a no-layoff policy, in theory let alone in practice. Most students can barely remember the concept when they graduate.

A more troubling reason is that many professors at Harvard and other MBA schools are deeply skeptical of offering workers such a bargain.

"It's a terribly non-optimal and inefficient policy," says George P. Baker, the co-chair of the HBS doctoral program. "Lincoln Electric is a special case. Unless there is some other reason for having it, as part of an incentive system, you would be wrong to recommend it."

"I'm not unsympathetic to guaranteed employment and the long-term social strengths it builds," says James Rebitzer, Chair of the Business Policy Department at Boston University' School of Management, "But I think there are only a very few special circumstances where a commitment to no-layoffs actually improves operating efficiency."

Harvard students such as Corey Crowell (MBA 2009), who read the case just days before we met, got the message: "I just worry that the sense of a guaranteed job would create complacency ... look at the auto industry."

At MIT's Sloan School, Thom Kochan is more positive about the competitive advantage of guaranteed employment as part of a "whole incentive system." But Prof. Kochan says most employers run from no-layoff policies such as Lincoln Electric's because "Few organizations in America are willing to have as egalitarian a compensation system in terms of income levels from top to bottom." (That's polite for "executive greed.")

Harvard labor economist Richard Freeman bemoans the fact that layoffs are still accepted as an effective management tool, despite mounting evidence to the contrary: "No business school encourages students to think about a scenario where they don't have the option of getting rid of (employees.) It requires a different set of skills which I don't think our B schools are very good at."

When Norm Berg wrote the case in 1975, he wanted to challenge students to examine the basic principles of our economy. "Lincoln Electric has felt all along that job security is important to people," Berg told me. "But most professors and students at business schools now have no personal experience with layoffs or are even familiar with people for whom this might have been a problem. (Guaranteeing employment) does not fit their view of the world. It's unfortunate, but not surprising."

After the human carnage of the past two years, that "view of the world" - which dominates most MBA programs - needs updating. The Lincoln Electric case will be on most reading lists again next fall, but the country needs more B-school professors to help students understand its powerful message. Then, hopefully, more newly-minted MBAs will consider adopting no-layoff policies once they become responsible for the future of their employees and their families.